If you know what you are doing, biotech events are the most lucrative vol strategies to trade. Knowing what you are doing is hard. There's a lot of information to absorb and much of that information is spread in the dark channels. Lots of differing opinions and uncertainty lead to lots of mispricings. Plus generally there's enough liquidity to trade a pretty large book.
I sold 10 Apr13 $6 puts on EXAS a few weeks ago @ $0.40. You guys are making me nervous. I may close them out for a small profit. I did my due diligence, but it apparently wasn't diligent enough. I am amazed at how often I learn just how much I don't know.
Yeah, that's why I don't do it anymore Had some good trades, but overall results are what is important. Liquidity is very important and if I went back to this, I'd try to do a better job screening candidates. I don't know what the probability of this event is, but what is essentially a binary event, sometimes had an unexpected 3rd outcome and option sellers generally, cleaned up. That was rare, though. GL to OP. Thanks for posting the trade.
I haven't traded much biotech in a couple of years. I was active in VVUS last year but that was about it. I used to trade it more, but it helped to have access to research analysts who could distill the drug information into plain english.
It's impossible to price options objectively for these types of companies. The probabilities are not quantifiable like they are for an established company like BMS. They are matters of opinion based on widely varying levels of information and expertise... and perceptions of what is the likely outcome can turn on a dime. I used to work as a consultant to Biotech companies like EXAS who couldn't afford their own in-house expertise. Often I would be asked to present data at an analyst meeting. It wasn't so much that I knew more than the company employees about what was going on as it was that I would add to the apparent head count by providing another body that could talk. The people from the hedge funds that had funded the company were particularly brutal. They would come in in their $1000 suits and each would set up their recording equipment pointing at the podium. Then as the presentations started they would get on their cell phones and have their traders on the phone ready to buy or dump based on what was said. I used to be afraid I would get sick before I could present. I knew if I said the wrong thing the stock could take a dive and the company could go to the wall.
oh biotechs... memories of buying DNA(acquired) straddles before avastin data/FDA releases. Then there were the ones that didn't work so well, CTIC. Point is, there's no explicit edge unless you have insider info, everything else is still an implicit bet on mkt IV.